Virginia’s love-hate relationship with federal spending
May 13, 2010 by cs
At a news conference last week at Northrop Grumman’s Rosslyn, VA offices, where a panoramic view of Washington loomed outside a floor-to-ceiling wall of glass, Virginia Gov. Robert F. McDonnell ticked off the reasons he thinks the giant defense contractor chose to locate its new corporate headquarters in the commonwealth.
He cited the state’s low corporate tax rate, its business-friendly regulations and right-to-work laws that prohibit requiring employees to join unions.
One factor the Republican didn’t mention: The massive flow of federal spending that provides the core of Northrop’s business and has made it the nation’s 61st-largest company.
McDonnell has been a leading voice in railing against rising federal spending. But lost amid the calls for Washington to freeze or reduce spending is this twist: Although most economists agree that mounting federal debt could be dangerous to the national economy, Virginia has thrived on Washington’s decade-long spending spree, according to analyses done by professors at Virginia colleges.
Ten cents of every federal procurement dollar spent anywhere on Earth is spent in Virginia. More than 15,000 Virginia companies hold federal contracts, a number that has almost tripled since 2001. Total federal spending — from salaries to outsourced contracts — has more than doubled, to $118 billion, since 2000, as homeland security and defense spending skyrocketed in response to the 2001 terrorist attacks and the wars in Iraq and Afghanistan. By 2008, it accounted for about 30 percent of Virginia’s entire economy.
Federal dollars have filtered through the rest of the economy, too, helping to build the high-tech Dulles corridor and funding new homes and cars for federal workers and contractors and meals at local restaurants. The billions have helped fuel the economic boom cycles of the past decade and have cushioned the blow of the recent recession, particularly in Northern Virginia, where the unemployment rate has stayed stubbornly below 6 percent, less than the state and national rates.
“We have a rich uncle, I like to remind people — Uncle Sam,” said Stephen Fuller, director of the Center for Regional Analysis at George Mason University.
Democrats in Virginia, including both of the state’s U.S. senators, also talk about the need for restraint in federal spending. But the Democrats have mostly backed President Obama’s major spending initiatives, such as the $787 billion stimulus package, while Republicans have made restraint a core campaign theme.
U.S. House Minority Whip Eric Cantor (R-Va.) has said excessive spending “threatens the future of our nation, our workers, and our families.” State Attorney General Ken Cuccinelli II (R) has decried the costs of a federal health-care bill that he will soon argue in court is also unconstitutional.
In an interview, McDonnell acknowledged last week that federal per-capital spending is high in Virginia. And it is true, he said, that most of Northrop Grumman’s business comes from the government. But he said the company’s business is largely defense-related, including shipbuilding in the Newport News area.
“I call that good investment and good federal spending,” he said.
He said the government must restrain spending in other areas — entitlements, earmarks and “other kinds of pork projects.”
“You’re getting up to a point of a $12 trillion and growing national debt, which is well more than $100,000 per American family,” McDonnell said. “It’s an unsustainable level of spending. Everybody knows that.”
The need to reduce federal spending and the government’s intrusion into private markets has been a consistent theme for McDonnell. The message helped propel him to an 18-point margin of victory in the gubernatorial election last year, and it dovetails with a resurgent tide of national discontent about Washington’s spending practices.
McDonnell’s argument has been that curbing spending is key to cutting taxes as a way to return money to individuals and businesses and spur private-sector development.
“Today, the federal government is simply trying to do too much,” McDonnell said from the well of the Virginia House of Delegates during his nationally televised response to President Obama’s State of the Union address in February. “Without reform, the excessive growth of government threatens our very liberty and prosperity.”
But a notable shrinkage of government would greatly threaten Virginia’s prosperity, Fuller said.
“The economy would just be a basket case without the federal government,” he said. “This is the automotive sector in Detroit, the entertainment sector in Vegas, the financial-services sector in New York. It’s bigger than manufacturing. It’s bigger than tobacco. It’s certainly bigger than mining. What does Virginia have? We are the headquarters of the federal government.”
So much of the federal budget is spent on defense and homeland security that to seriously cut spending would require a hit to those sectors, Fuller said.
And that would be particularly tough for Virginia, home to the world’s largest naval base, more veterans than anywhere else in the country and thousands of information technology companies that rely on government contracts. Defense spending accounts for 900,000 Virginia jobs, close to one in five in the state.
With all those positions comes a secondary boost to the economy, said Roy Pearson, professor emeritus at the Mason School of Business at the College of William and Mary. The companies that hold federal contracts “need legal services. They need electricity. They’re big power users. All of their employees are spending their money.”
The stimulus package has been a particular boon to Virginia and other parts of the Washington region, where millions have gone to government contractors to help spend other stimulus money. The contractors include consultants who are managing projects and software engineers who have built databases to track the spending.
Northrop Grumman is one company that has benefited enormously from stimulus dollars — the firm has been awarded $140 million in stimulus-funded contracts, including more than $20 million to job sites in Virginia, according to federal statistics.
At last week’s news conference, chief executive Wes Bush was clear about the leading factor in Northrop’s decision to move to Virginia, instead of Maryland or the District.
“It was difficult to come down to our final selection,” he said. “But in that final selection, Northern Virginia was the winner. Northern Virginia has several available facilities that provide us the proximity that we need for our frequent interaction with our federal customers.”
If deficit spending continues to rise, many economists say it could wreak havoc on the nation’s economy, creating something of a bind for Virginia.
“If you don’t have the political will to live within your means, your standard of living will eventually decline,” said William M. Shobe, director of the Center on Economic and Policy Studies of the Weldon Cooper Center for Public Service at the University of Virginia.
Shobe said limiting spending would adversely affect Virginia in the short-run.
But he added, “If the federal government were to continually run really large deficits, the Virginia economy will suffer along with everyone else.”
– By Rosalind S. Helderman, Washington Post Staff Writer, Thursday, May 6, 2010; B01 – http://www.washingtonpost.com/wp-dyn/content/article/2010/05/05/AR2010050505205.html